3 Mistakes to Avoid When Rolling Over an IRA

Since the law changed a few years ago, many people have been interested in rolling their Traditional IRAs into Roth IRAs. Anyone, no matter their income, can convert a Traditional IRA to a Roth, and that has many scrambling to take advantage of what the Roth IRA has to offer.

Many are aware that when you perform such a rollover, you need to pay taxes on the amount. Whatever you roll into a Roth needs to be taxed, since a Traditional IRA takes advantage of tax deductions. However, there are 3 other rules that you need to be aware of if you decide to roll your IRA over into another IRA:

60-Day Rollover

In many cases, you will have to withdraw money from your IRA in order to perform the rollover. Not all custodians offer a trustee-to-trustee transfer. If you have to withdraw the money from your IRA in order to move it to the new IRA, it’s important that you open your new IRA within 60 days. If it takes longer than 60 days for you to open your new IRA and deposit the money, then it will be treated as a straight withdrawal. You could be taxed at your ordinary income rate and be subject to an early withdrawal penalty, if applicable.

When you do put the money into your new IRA account, make it clear that this is a rollover contribution. Most brokerages allow you to check a box that indicates that you are dealing with a rollover. Make sure you check that box.

Same Property

Not only do you need to complete your rollover within 60 days, but you also have to make sure that you are transferring the same property. You can’t withdraw cash, use the cash to purchase stock shares, and then transfer those stock shares into your IRA. If you withdraw cash, you have to put cash into your new IRA. You can transfer other assets between IRAs with your rollover, but you need to make sure you do it correctly. Ask your custodian for help with this if you have questions.

Wait One Year

Finally, you have to realize that there is a one-year waiting period between IRA transfers associated with each account. If you rollover money from one IRA to another, you can’t perform a rollover to or from either of the accounts for at least a year.

The good news is that there is an exception in the case of rollovers from your qualified employer-sponsored retirement plan. Additionally, this doesn’t apply if you are making a Roth IRA conversion. So if you are converting your Traditional IRA to a Roth IRA, you don’t have to worry about this rule.

It’s important to get professional help if you have questions about your IRA rollover. The IRS has rules governing the way you transfer money between tax-advantaged retirement accounts, and you don’t want to run afoul of those rules. If you aren’t careful, you could find yourself paying higher taxes than anticipated, and hit with unpleasant fees.